Discussing an exit strategy within a business plan is likely not a popular subject for entrepreneurs. After all, no entrepreneur goes into a new business venture with the intention of seeing it fail. However, new business owners must be cognizant of the fact that a large majority of businesses do indeed fail. As such, having an exit strategy is of paramount importance to protecting one’s interests and the reason why some businesses are better able to handle the costs to close and liquidate their operations. So, should entrepreneurs have an exit strategy within their business plan?
The Importance of Exit Strategies
As an aspiring entrepreneur, you’ve decided that to succeed means you must remain positive, believe in your business plan and be prepared for the rollercoaster ride that accompanies business ownership. You’ve committed yourself to making sure that you won’t let the fear of failure derail your overall business aspirations.
There is nothing at all wrong with remaining positive and committed to success. However, no matter how much research you’ve done, no matter how well you’ve laid out your business plan, your business might be destined to fail through no fault of your own.
Companies that use exit strategies don’t simply use them to define how they’ll ultimately close their doors. Instead, they use their exit strategies to define how they may exit various business operations. This could include exiting an unprofitable product line, business venture or market. Therefore, it’s important to see your new business venture’s exit strategy as part of your company’s overall strategic business plan. Don’t view it as a plan for failure. Instead, see it as your ultimate “what if” scenario.
“What if no matter what I’ve done, the business is still destined to fail? What do I do then?”
Defining Your Exit Strategy
A number of my customers see me as somewhat of a pessimist. After all, I always tell my customers about the importance of performing a market feasibility study before doing a business plan, and always insist on them being aware of the importance of contingency planning. I don’t view this as being pessimistic, but rather as being realistic about the consequences and costs of a business that doesn’t succeed.
As an entrepreneur, you must secure business credit without a personal guarantee and can’t have your personal credit tied into your company’s success or failure. Therefore, if you’ve decided to do this, doesn’t it just make sense to prepare for the worst – even if you feel that outcome is highly unlikely? It most certainly does! So, what areas should you look at within your exit strategy?
1. Protecting Investor Interests
If your new business venture relies upon outside investment, then it’s imperative that those investors be provided with some form of guarantee. While their concerns lie with your business plan’s long-term approach, their main issues are with how their investment will be protected and ultimately, with how they’ll be able to recoup that investment. Protecting investor interests involves defining the liquidity of the company’s assets and to outline how those assets will help cover any debt obligations.
2. Defining the Value of Fixed Assets
Your company’s equipment, machinery, real estate holdings, warehousing, buildings, office furniture and computers, can all be classified as fixed assets. These are commonly referred to as “non-current assets” and are seen as those assets that can’t immediately be turned into cash, or whose liquidity doesn’t allow them to be converted immediately.
Some assets like real estate, appreciate in value, while others such as equipment and machinery, depreciate in value. Understand the differences in each and account for the value of these fixed assets within your exit strategy.
3. Defining Inventory’s Liquidity
Many see inventory as a part of a company’s fixed or non-current assets. While it is a constant reminder of the cost of money, and is extremely expensive to finance, it also happens to be a company’s biggest asset on its balance sheet. However, some inventory is much easier to liquidate than others. For instance, raw material inventory is often easier to liquidate than semi-finished or finished inventory.
In this case, separate the value of inventory from the second portion of defining your company’s value of fixed assets. While this is not a “hard and fast rule”, it’s still important to be aware of what inventory is much easier to liquidate.
The above video is from the post: Choose the Right Supply Chain Strategy: Make it an Easy Choice
4. Licensing, Proprietary Designs & Patent Values
Some companies claim to be able to apply a value to client lists. Despite this, it’s rather difficult to apply a value to business knowledge. However, this isn’t the case when it comes to patent holders, companies who provide licenses or those who own proprietary designs. If your new business venture is predicated on launching a proprietary design, that you’ve taken the time to patent, then you must be able to define its value in a way that allows you to recoup your investment.
By no means is this all there is to contingency planning. However, deciding to include an exit strategy within your business plan is the first and most important step. The above must be treated simply as a guideline, as all four of these aforementioned items can’t be applicable to all new business ventures. What is applicable is that preparing for the worst must be part of your overall business plan.
Your exit strategy must define how you’ll protect your interests and that of any outside investors. After all, if you were investing in someone else’s business, wouldn’t you want some kind of assurances? Providing that assurance will not only convince them your plan is solid, but this entire exercise might just provide you with the piece of mind you need to move forward on your new venture.
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